BTC miners hit a rough patch this year.
Galaxy’s Bitcoin Mining Team takes a look at all of the current challenges, plus 4 reasons to stay optimistic about the industry.
This is a thread that sums up our mid-year bitcoin mining report. 🧵👇
Cash-constrained miners are forced to rethink treasury management strategies.
While taking full BTC price exposure was rewarded in the market during the bull run, going forward, miners that are sufficiently hedged will likely have better executions in the capital markets.
The era of widely available capital has stalled, challenging companies to find ways to finance ongoing costs.
Valuations for miners have suffered as BTC has tumbled, making it dilutive to raise equity and expensive to raise debt capital.
Miners have been put in a precarious position due to:
◼️ supply chain constraints
◼️ infrastructure construction delays
◼️ declining mining fundamentals
◼️ rising energy prices
That’s shaping up for a slower rate of hashrate growth this year than previously forecasted.
We’ve revised our hashrate forecast, predicting a baseline of 250 EH/s.
Uncertainty over future cash flow generation has increased the cost of capital. And on the equity side, it’s difficult to raise without diluting existing shareholders’ stake.
Miners are forced to sell BTC to cover costs. In H1 2022, publicly traded miners sold 24,501 BTC.
In 2022, we’ve experienced a challenging energy market due to macrofactors like Russia’s invasion of Ukraine.
These factors also led spikes the cost of natural gas, which serves as a price-setter and has an outsized effect on real-time forward contract pricing.
The rise in energy prices has increased the cost curve for mining to 75 - 90/MWh. Across the US, electricity costs increased by 24% since last year while hashprice fell 57%.
This means miners should think about power strategy and the risk/reward of hosting infrastructure.
Supply-chains remain disrupted, which is having an impact on miners along with price inflation of key infrastructure.
Lead times on switch gears and transformers have expanded, pushing back construction timelines anywhere from 2 - 6 months.
A bright spot has been the progress made on Stratum V2.
It’s a messaging protocol for comms between miners and pools that organizes the creation of blocks and submission of hashes.
The update addresses insufficient documentation, inflexibility, and security issues.
Looking forward to the second half of 2022 and beyond, we expect to see some of the following trends remain and some new trends emerge:
1️⃣ A number of miners have facilities hashing in Texas. They have provided enormous support to the stressed grid by curtailing operations as demand for energy skyrocketed over the summer.
Over time, this may result in network difficulty drops in the summer months.
2️⃣ Immersion cooling allows for efficiency improvements in terms of j/TH, with companies expecting between 20-40% higher efficiency compared to regular air-cooled machines.
Questions still remain about whether or not it can actually improve the life expectancy of ASICs.
3️⃣ Over the past year and a half, there has been little interest from miners to execute hedging and other treasury management strategies.
Going forward, the experienced miners will have dedicated resources towards hedging energy price risk and bitcoin price volatility.
4️⃣ A greater emphasis is being placed by policymakers on bringing chip development closer to home to reduce reliance on Chinese manufacturers.
Although it will take time for impact to be felt across industries, the hope is to relieve supply chain backlogs and lower prices.
Falling BTC prices and a continued rise in hashrate from the end of last year drove BTC miners’ profitability lower.
The 10-day moving average hashrate over the first 6 months jumped 23%, while total mining rewards fell by a quarter.
Many factors have caused mining revenue per terahash to drop, hurting profitability.
At the beginning of 2022, revenue per TH stood at 0.25/TH and has since decreased to roughly 0.10/TH.
Only miners with the lowest costs of production will be able to operate profitably.
A bull market trend saw miners rewarded for future hashrate. That became a big part of raising capital.
In a bear market, growth in hashrate with depressed bitcoin prices makes economics very challenging.
Because miners were on the hook for buying the machines they previously signed up for, hashrate continued to grow even as price declined significantly.
This trend further contributed to the deep decline in hashprice since the beginning of the year.
There’s still plenty of opportunity for H2 to bring some momentum to the industry.
What else would you like to learn about bitcoin mining?
For the rest of our in-depth analysis, read our full report here:
this twitter thread.